Global REIT performance leads real estate out of the downturn - Ernst & Young - United Kingdom

London March 10 2010: Although the property sector is generally considered to be a lagging indicator of economic downturns, real estate investment trusts (REITs) have been bucking the trend and outperforming other asset classes, according to Ernst & Young’s fourth annual Global REIT report.

The report – Against all odds – which analysed publicly-listed REIT markets in 16 major countries throughout 2009, reveals that the resiliency of the REIT model has boosted share prices by 60% to 100% in many markets.

Peter Beckett, Ernst & Young director and co-author of the report explains, “One of the key advantages of the REIT model is that it provides a liquid form of real estate investment and this, together with the transparency and regulation of public markets, has enabled REITs to bounce back quickly from the effects of the global recession.

“REITs have raised billions of dollars in capital since March last year through secondary offerings, and they are using these funds to reduce their debt, recapitalise their balance sheets and position themselves for growth.”

The report says that in 2009 Asia had the best performing REITs. Singapore and Hong Kong REITs posted 85.6% and 64.5% returns respectively with Malaysia (38.6%) and South Korea (28.4%) also performing strongly.

UK REITs underperform
However, the performance of global REITs has not been mirrored in the UK, where although the rate of return was over 14% during 2009, the last three years saw UK REITs post a negative return of -26%. Also, total market capitalisation in the UK declined by 10% from $41bn in June 2008 to $37 last year, but this was partially attributable to the 17% decline in value of the pound versus the US dollar.

“The underperformance of UK REITs is largely due to the depth of the economic downturn in the UK which has been more severe than in other jurisdictions,” says Beckett.

Life line from rights offerings
Since March 2009, many REIT markets around the world have seen significant increases in share prices and REITs have raised billions of dollars in secondary offerings to shore up their financial positions.

Even in the UK, despite last year’s poor performance, REITs succeeded in raising $8bn in capital from rights offerings which has been used to reduce debt and strengthen balance sheets.

“Rights offerings have been the silver lining in a pretty poor year for UK REITs,” says Beckett. “The market appetite for REITs reflects the expectation that commercial property markets are poised for a recovery. Some have raised capital to build a war chest that would enable them to acquire new rental properties and properties with development potential, suggesting there is an expectation that development activity will slowly begin to increase.”

Weakness in global REIT model
The report also outlines some key weaknesses in the REIT model exposed by the global financial downturn.  Most notably, the requirements placed on REITs to distribute a large percentage of their income to investors made it very difficult for most REITs to conserve cash at a time when they most needed to.

Also, restrictions on REIT debt levels in many countries – designed to prevent REITs from over-leveraging during a period of market growth – had potentially serious tax implications for REITs during the downturn.

“One thing we clearly learned from the downturn, and which needs to be addressed, is that governments need to take a look at REIT distribution rules because the ability to conserve cash could be critical to the survival of some REIT businesses next time,” adds Beckett.

The future
Looking ahead, IPOs may well gain momentum during 2010 and REITs may also start to look like an attractive exit strategy for private real estate owners, both helping to buoy REIT markets globally. He concludes, “With property yields increasing REITs should be able to offer acceptable returns with a focus on long term stable cash flows, helping to attract more investors and boosting share prices. With this in mind 2010 should be a better year for REITs.”